In the run-up to the elections in 2014, Mr Narendra Modi made a thoughtless remark on the economy. I responded by saying “Mr Modi’s knowledge of economics can be written on the back of a postage stamp.” It was a fair comment but, I believe, Mr Modi has not forgiven me for that comment! Not an issue, but time has proved that I was right.
At the end of five years of Modi sarkar, we can compile a long chargesheet on the government’s acts of omission and commission. Top of the list, in my view, will be the management of the economy. Among the reasons for the mismanagement are (1) the Prime Minister’s unfamiliarity with macro-economics and unwillingness to learn; (2) the Finance Minister’s inability to anticipate how trade, business, investors and consumers will respond to policy changes; and (3) the government’s disdain of economists and over-reliance on bureaucrats.
A different league
Running a state government is very different from governing India. A chief minister does not have to worry about the exchange rate or the current account deficit or monetary policy or external developments (e.g. the trade and tariff war between the US and China or US sanctions on Iran). A chief minister will do well in economic management if he manages the revenues of the state, keeps a control on expenditure, gets large grants from the Central government and attracts sufficient private investments. Many well-grounded chief ministers, without much formal education, have earned praise for their management of the state’s economy.
Managing India’s economy is playing in a different league. Successful chief ministers have floundered when appointed finance minister. On the other hand, Dr Manmohan Singh, without any political experience, was an outstanding finance minister because of his mastery of macro-economics and willingness to engage continuously with reputed economists. Without Dr Singh, there would have been no liberalisation or the many reforms that were undertaken.
Mistake after mistake
When the management of the economy is entrusted to novices or tyrants, the consequences will soon follow. Demonetisation was a classic example. No economist worth her undergraduate degree would have advised the Prime Minister to declare 86 per cent of the currency in circulation as illegal tender, yet it was done. Since Mr Arun Jaitley has never publicly owned responsibility, it must be concluded that the decision was entirely the Prime Minister’s. To his credit, Mr Modi has owned responsibility, but he has refused to admit that demonetisation derailed the economy, killed MSMEs, destroyed jobs and aggravated the crisis in the agriculture sector.
More wrong decisions followed demonetisation. Budgets were made with little understanding of the economic behaviour of human beings; the GST was poorly designed and hurriedly implemented; the NPA issue was handled in a crude and ham-handed manner; unrealistic revenue targets were chased using despotic powers and unfair means; and there was a constant search for quick-fix bureaucratic solutions to structural economic problems.
Dismal report card
The Department of Economic Affairs, Ministry of Finance, has prepared a report card at the end of five financial years. Helpfully, the report has highlighted data for the post-demonetisation years beginning in 2016-17. Let me capture the major headlines from the report:
* Real GDP growth in the three years 2016-17, 2017-18 and 2018-19 declined from 8.2 per cent to 7.2 per cent to 7.0 per cent. Implied growth in Q4 of 2018-19 was 6.5 per cent.
* Gross Fiscal Deficit was 3.5, 3.5 and 3.4 per cent of GDP. The last number for 2018-19 is suspect because tax collections have fallen short by 11 per cent of the revised estimate.
* Capital expenditure was stagnant: at 1.7 per cent of GDP in 2018-19 it was the same as in 2015-16.
* GDP deflator, which is a proxy for inflation, rose from 3.1 per cent to 4.2 per cent.
* The current account deficit increased from 0.6 per cent of GDP to 1.9 per cent to 2.6 per cent.
* Both private consumption expenditure and government consumption expenditure were stagnant.
* The fixed investment rate was stagnant between 28.2 and 28.9 per cent of GDP, much below the high of 34.3 per cent achieved in 2011-12.
* The distress in agriculture sector was reflected in the sharp decline in growth rate of GVA from 6.3 to 5.0 to 2.7 per cent.
* Growth in GVA in industry was stagnant; growth in GVA in services declined from 8.4 to 8.1 to 7.4 per cent.
* Net flow of portfolio investment turned negative in 2018-19.
The boasts of the BJP have been blown away. Our worst fears about the state of the economy have come true. Further, the growth rates declared by the CSO (already suspect in the eyes of many economists) have come under a darker cloud. The NSSO which reported the highest unemployment rate in 45 years has now punched a big hole in the MCA 21 data base used by the CSO. It turns out that 36 per cent of the companies in the MCA 21 data base are defunct or not traceable!
India’s economy is at its weakest point in many years. Hence, Mr Modi is trying to take the narrative away from the economy. That is a loud caution for those who will vote on May 12 and May 19.
This article first appeared in the print edition on May 12, 2019, under the title ‘Economy has entered danger zone’. Website: pchidambaram.in. Twitter: @Pchidambaram_IN